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Green asset pricing

Author

Listed:
  • Ivan Jaccard

    (ECB - European Central Bank - European Central Bank)

  • Gauthier Vermandel

    (LEDa - Laboratoire d'Economie de Dauphine - IRD - Institut de Recherche pour le Développement - Université Paris Dauphine-PSL - PSL - Université Paris Sciences et Lettres - CNRS - Centre National de la Recherche Scientifique)

  • Ghassane Benmir

    (LSE - London School of Economics and Political Science)

Abstract

Climate change is one of the greatest economic challenges of our time. Given the scale of the problem, the question of whether a carbon tax should be introduced is hotly-debated in policy circles. This paper studies the design of a carbon tax when environmental factors, such as air carbon-dioxide emissions (CO2), directly affect agents' marginal utility of consumption. Our first result is that the optimal tax is determined by the shadow price of CO2 emissions. We then use asset-pricing theory to estimate this implicit price in the data and find that the optimal tax is pro-cyclical. It is therefore optimal to use the carbon tax to "cool down" the economy during booms and stimulate it in recessions. The optimal policy not only generates large welfare gains, it also reduces risk premiums and raises the average risk-free real rate. The effect of the tax on asset prices and welfare critically depends on the emission-abatement technology.

Suggested Citation

  • Ivan Jaccard & Gauthier Vermandel & Ghassane Benmir, 2022. "Green asset pricing," Working Papers hal-03510811, HAL.
    • Handle: RePEc:hal:wpaper:hal-03510811
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    Cited by:

    1. is not listed on IDEAS
    2. Ferrari Minesso, Massimo & Pagliari, Maria Sole, 2023. "No country is an island. International cooperation and climate change," Journal of International Economics, Elsevier, vol. 145(C).
    3. Kim, Kyounghun & Yang, Eunsun & Choi, Yoonseok, 2024. "Heterogeneous effects of carbon tax, subsidy and foreign carbon emissions on low- and high-carbon firms," Economic Analysis and Policy, Elsevier, vol. 83(C), pages 260-279.
    4. Lodge, David & Pérez, Javier J. & Albrizio, Silvia & Everett, Mary & De Bandt, Olivier & Georgiadis, Georgios & Ca' Zorzi, Michele & Lastauskas, Povilas & Carluccio, Juan & Parraga Rodriguez, Susana &, 2021. "The implications of globalisation for the ECB monetary policy strategy," Occasional Paper Series 263, European Central Bank.
    5. Boneva, Lena & Ferrucci, Gianluigi & Mongelli, Francesco Paolo, 2021. "To be or not to be “green”: how can monetary policy react to climate change?," Occasional Paper Series 285, European Central Bank.

    More about this item

    Keywords

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    JEL classification:

    • Q58 - Agricultural and Natural Resource Economics; Environmental and Ecological Economics - - Environmental Economics - - - Environmental Economics: Government Policy
    • G12 - Financial Economics - - General Financial Markets - - - Asset Pricing; Trading Volume; Bond Interest Rates
    • E32 - Macroeconomics and Monetary Economics - - Prices, Business Fluctuations, and Cycles - - - Business Fluctuations; Cycles

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